Goldman Sachs Group Inc. The asset management section will make significant cuts to the $59 billion of alternative investments that hurt its profits.
Alternative assets can include private equity or real estate instead of traditional investments like stocks and bonds.
The company will unload its holdings in the coming years and replace some of those funds on its balance sheet with outside capital, according to Julian Salisbury, Goldman Sachs’ chief investment officer for wealth and asset management.
“I would expect to see a significant decline from current levels,” Salisbury told Reuters. “It won’t go to zero because we will continue to invest in and along with the funds, as opposed to individual transactions on the balance sheet.”
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Goldman Sachs had a bad fourth quarter, missing Wall Street earnings targets by a substantial margin. The bank is laying off more than 3,000 employees in its biggest round of layoffs since the 2008 financial crisis.
The bank’s asset and wealth management posted a 39% drop in net income to $13.4 billion in 2022, and its income from equity and debt investments declined 93% and 63%, respectively, according to earnings announcements. In the past week.
He $59 billion of alternative investments retained on the balance sheet decreased from $68 billion a year earlier, according to the results. The positions included $15 billion in equity investments, $19 billion in loans and $12 billion in debt securities, as well as other investments.
“Obviously the environment for asset outflows was much slower in the second half of the year, which meant we were able to make less of a portfolio gain compared to 2021,” Salisbury said.
Salisbury expects to see “a faster decline in legacy balance sheet investments” if the environment for asset sales improves.
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“If we had a couple of normalized years, we would see the reduction” during that period, he said.
He also said that clients are showing interest in private credit due to weak capital markets.
“Private credit is interesting to people because the available returns are attractive,” Salisbury said. “Investors like the idea of owning something a little more defensive but high yielding in the current economic environment.”
Goldman Sachs’ asset management arm closed a fund worth more than $15 billion earlier this month to make junior debt investments in private equity-backed businesses. Private credit assets in the industry have more than doubled to more than $1 trillion since 2015, according to data provider Preqin.
Investors are also becoming increasingly interested in private equity funds and are trying to buy positions in the secondary market when existing investors sell their holdings, Salisbury said.
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The US investment grade primary bond market started the new year with a series of new deals.
Salisbury said the market rally has “more legs” as investors are willing to buy bonds with longer maturities while seeking higher credit quality due to the uncertain economic environment.
Goldman Sachs Economists It forecasts the Federal Reserve will raise interest rates by 25 basis points each in February, March and May before holding steady for the rest of the year, Salisbury said.
Reuters contributed to this report.
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